BREAKING: How full is the [2007 Edition] Schering CEO honey-pot?
[Click it to enlarge — as if you’d need to! Heh!]
Schering just filed its proxy statement with the SEC tonight, and the pollsters who bet [about] “the same as 2006” are the WINNERS! [See poll results — at lower left.]
More from the proxy, shortly, but above is a summary graphic. His compensation is actually up about 2.3 percent, all in — note that Mr. Hassan has a little more “guaranteed” to him (that cannot be forfeited) — about $1.8 million more than last year, at this time. [N.B.: Here is my analysis of the 2006 CEO pay disclosures.]
Now, consider this [emphasis supplied] from tonight’s Schering narrative:
. . . .A Special Note About 2008
In the pharmaceutical industry today, media firestorms about complex drug safety and efficacy concerns are frequent and intense. Often, these events impact stock price. Sometimes these events also impact prescriber and patient preferences, which can impact future sales. These impacts frequently occur whether or not there is medical and scientific support for the concerns publicized in the media.
Schering-Plough’s Board, including the Compensation Committee, believes having a CEO with deep industry experience, together with an experienced team of senior executives, can position Schering-Plough, as well as is possible, in today’s environment. Schering-Plough tries to manage such situations in a manner to best protect long-term shareholder value, and at the same time assist the prescribing physicians who are the only ones qualified to advise their patients about individualized health care needs.
Schering-Plough is currently facing such a challenge, which began in early 2008 relating to a Merck/Schering-Plough cholesterol joint venture clinical trial, called ENHANCE. That clinical trial included the drug VYTORIN and was initiated (and designed earlier) by the Merck/Schering-Plough cholesterol joint venture in 2002, before Hassan and the new management team joined Schering-Plough. Details of the matter are discussed in Schering-Plough’s 2007 10-K which was filed with the SEC on February 29, 2008. This challenge has pressured the stock price, which has dropped since year end.
The pay-for-performance elements of Schering-Plough’s executive compensation program have been designed to closely link the interests of senior management with that of the shareholders and the creation of shareholder value. Even in the current situation, where the Board believes management has handled the challenge well, because the stock price has declined, the named executives have lost significant net worth, and potential future compensation for each of them is at risk.
The named executives, along with the other top 40 Schering-Plough executives, are subject to rigorous stock ownership requirements (eight times salary for the CEO and four times salary for the Executive Vice Presidents and Senior Vice Presidents). See the chart on page 29 for details. Equity compensation also represents a significant portion of each named executive’s total compensation. As a result of their equity holdings, the named executives have each lost value along with shareholders.
Hassan also holds additional shares he purchased with $4.6 million of his personal funds in 2003. In 2008, Hassan committed to making an open market purchase of $2 million of Schering-Plough common shares with personal funds upon receiving legal clearance to do so (anticipated following announcement of first quarter earnings for 2008).
As mentioned earlier, the named executives have a significant amount of future pay at risk, which may be impacted by the challenges described above. For example:
▲ The outstanding five-year transformational incentive (with a performance period ending in 2008) uses total shareholder return (both actual and relative to the Peer Group) as a performance metric. Stock price declines often adversely impact total shareholder return. As a result, named executives Hassan, Bertolini, Cox, Sabatino and Saunders may lose future compensation with respect to the transformational incentive if the stock price does not increase prior to the completion of the performance period. For example, had the performance period ended March 31, 2008 (rather than December 31, 2008 as provided in the plan), the payout would have been zero for each of them based on performance metrics of actual and relative total shareholder return.
▲ The outstanding three-year performance-based share awards (with a performance period ending December 31, 2009) use total shareholder return (both actual and relative to the Peer Group) as a performance-based metric for one-half of the award opportunity (sales and earnings growth metrics apply to the other half of the award opportunity). Stock price declines often adversely impact total shareholder return. As a result, all of the named executives may lose future compensation with respect to the three-year performance-based share awards if the stock price does not increase.
The Compensation Committee, the Board and the management of Schering-Plough (including Hassan and the other named executives) take pride in the performance-based compensation system, and they remain committed to maintaining the integrity of the system in good times and bad. Accordingly, should the current (or future) challenges result in lagging performance in 2008, as measured by the applicable sales, earnings and actual and relative total shareholder return metrics, then compensation to executives in 2008 will be significantly reduced from the compensation reported in this proxy statement, which relates to performance periods where performance — measured by those same metrics of sales, earnings and actual and relative total shareholder return — was strong. . . .
Gee — that makes me feel better.
Or. not. so. much.
As luck(!) would have it — lucky for the Schering executives, that is — the Compensation Committee of the Board measures “Total Shareholder Return” only on one day, each year — December 31, 2007, in this case. So, all the Schering executives need do, is manage to the window-dressed year end, right?
Does this make the stock price decline any less real in the board’s collective mind, for the rest of the Schering shareholders? Odd.
LATER UPDATE: I forgot to mention, in addition, that for every $1 Mr. Hassan can keep Schering common stock from falling, he “saves himself” $4,070,799.30, beginning May 1, 2008 — and once May 1, 2009 passes, he’ll save himself $4,422,799.30, for each $1. This will be true, even if the Board never awards him another single share, or option. Said another way, for every $1 decline in Schering stock, Mr. Hassan loses over $4 million of value — a very powerful incentive to try to stabilize the recent Schering stock price slide. From a closing price of $27.24 per share, on January 10, 2008 — to $ 16.55, the close on April 14, 2008, then, Mr. Hassan has seen his equity value drop by over $43.5 million (albeit a not yet realized, or paper, loss — as he hasn’t sold anything to “fix” these declines).
This is why it is so terribly important to find scrupulous CEOs — and/or retain very tough Compensation Committees — at the Board of Directors level. Otherwise, the whole exercise simply becomes one long gravy-train for extreme upper management.
That admission — the “backhanded gravy-train” admission — at Dot Point 1, above, quoted from the Compensation Report (at page 22) of the just-filed 2007 Schering proxy — says a lot more about the Schering-Plough Board, and its supposedly-independent, pro-active Compensation Committee, than it does about the Schering executives, actually (after-all, why would they ever push away from the table –“No, really, Uncle Hans — I’m stuffed! I can’t eat even one more gravy-laden biscuit!”). And that is unfortunate for all affected communities — Schering employees, stockholders, customers, suppliers, the pill-poppin’ public, and the doctors prescribing ’em. . . .
One constructive suggestion for “Uncle Hans” Becherer — the Chair of the Compensation Committee at Schering: Why not measure “Total Shareholder Return” eight times a year? Once at each quarter end, and once at each quarter’s mid-point? Then average ’em all out. Why wouldn’t that be “more aligned with shareholder interests” than managing to a window-dressed December 31?
But maybe I’m just surprised that the Board has paid this much, for presiding over a flawed study, one that flat-lined the flagship franchise. . . . I dunno.
[UPDATED: It seems that Schering’s “designated” Compensation Consultant, Ira Kay, of Watson, Wyatt [and a recent, and repeating, visitor to this blog! Big Wave, here!], on behalf of his patron, Hans Becherer, the Chairman of the Compensation Committee of Schering-Plough’s Board of Directors, has decided to remove “Growth in Market Capitalization” as one of the general metrics upon which Executive Compensation levels were judged, in 2007. It was one of the metrics in the 2006 proxy (page 25), rising from $25.5 billion in 2004, to $35.5 billion in 2006. For 2007, by my lights, the analogous number would have been only a little more than $39 billion — nothing like the rise in prior years. This is due to the fact that the Schering stock price had already begun to decline, due in large part to investigations, by Congress, of the ENHANCE matter, by December 31, 2007. So — while 2006 showed 38 percent growth from base (2004) levels, there would have been scant growth in this metric for all of 2007. Could this be why it was spiked?]